2010 (3) TMI 289 - HC - Income Tax

Scope of the term any work under section 194C sales of goods versus works contract The assessee engages in the business of the manufacture and marketing of drugs and pharmaceutical products. During the course of a survey, the assessee was found to be engaged in three kinds of activities involving pharmaceutical products. Firstly, certain products were manufactured by the assessee at its factory. Secondly, the assessee was getting products manufactured from third parties. Thirdly, the assessee had entered into an agreement under which pharmaceutical products were being manufactured by third parties to specifications and standards provided by the assessee under the trade-mark of the assessee. The Assessing Officer required the assessee to explain why it had not deducted tax at source under Section 194C and should not be treated as an assessee in default under Section 201(1). - ITAT observed that that the transactions between the assessee and the manufacturer is a contract for sale of goods and is not in the nature of works contract and, therefore, the provisions of Section 194C are not attracted Held that - Revenue was not justified in treating the assessee, as an assessee in default - The contract entered into by the assessee is not a contract for carrying on any work within the meaning of Section 194C. decided in favor of assessee

Issues Involved:
1. Interpretation of the expression "any work" under Section 194C of the Income Tax Act, 1961.
2. Determination of whether the contract between the assessee and the manufacturer is a contract for sale or a contract for work.
3. Applicability of Section 194C to the contract in question.
4. Analysis of relevant CBDT circulars and judicial precedents.
5. Consideration of the Finance Act of 2009 and its amendments to Section 194C.

Issue-Wise Detailed Analysis:

1. Interpretation of "any work" under Section 194C:
The core issue is interpreting the ambit of "any work" under Section 194C of the Income Tax Act, 1961. The Supreme Court in Associated Cement Co. Ltd. v. Commissioner of Income-Tax [1993] 201 I.T.R. 435 held that the expression "any work" has a broad connotation and is not restricted to works contracts. The term "any work" includes any activity carried out under a contract, including the supply of labor.

2. Contract for Sale vs. Contract for Work:
The Tribunal held that the agreement between the assessee and the manufacturer constituted a sale and not a contract for work. This decision was based on the fact that the property in the goods passed to the assessee only upon delivery, and the raw materials were purchased by the manufacturer. The Tribunal relied on the precedent set by BDA India Ltd. v. ITO [2006] 281 ITR 99 (Bom), which distinguished between contracts for sale and contracts for work based on whether the manufacturer sourced the raw materials independently and whether the property in the goods passed upon delivery.

3. Applicability of Section 194C:
Section 194C mandates tax deduction at source for payments made for carrying out any work. However, contracts for the sale of goods do not fall within its purview. The Tribunal found that since the agreement involved the sale of goods, Section 194C was not applicable, and the assessee could not be treated as in default under Section 201(1) or liable for interest under Section 201(1A).

4. Analysis of CBDT Circulars and Judicial Precedents:
Several CBDT circulars clarified that contracts for the sale of goods are outside the scope of Section 194C. Circular No. 86 dated 29 May 1972 and Circular No. 108 dated 20 March 1973 emphasized that contracts for sale, where the property in goods passes upon delivery and the raw materials are sourced by the manufacturer, do not attract Section 194C. Judicial precedents, including decisions by the Delhi High Court and Gujarat High Court, consistently held that such contracts are contracts of sale.

5. Finance Act of 2009 and Amendments to Section 194C:
The Finance Act of 2009 introduced an explanation to Section 194C, clarifying that "work" includes manufacturing or supplying a product according to customer specifications using materials purchased from the customer. However, it excludes manufacturing or supplying a product using materials purchased from a third party. This amendment was intended to clarify ongoing litigation about the applicability of Section 194C to outsourcing contracts. The amendment affirmed the understanding that contracts where the manufacturer sources materials independently and the property in goods passes upon delivery are contracts of sale.

Conclusion:
The High Court concluded that the contract between the assessee and the manufacturer was a contract of sale, not a contract for work. The Revenue's contention that the contract was for work was rejected based on the terms of the agreement, which indicated that the property in the goods passed upon delivery and the raw materials were sourced by the manufacturer. The Tribunal's decision was upheld, and the assessee was not deemed in default for not deducting tax at source under Section 194C. The appeal was dismissed, and the question of law was answered in favor of the assessee.

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